The Large Consequences and the Spillover Effects of a Small Shock

In this paper, we find that a small, transitory and sector-specific shock has large and long-lasting effects by inducing structural transformation. We also find evidence of causal spillover effects to the rest of the economy. We exploit a unique quasi-natural experiment: the European Union import ban on black tiger shrimps in Thailand from May 2002 to 2004. The price of black tiger shrimps plummeted by more than 50% and its production went close to zero within a few years. Using detailed household level Townsend Thai Project data, we investigate the effect of the EU ban on resource reallocation within and across sectors, change in sectoral productivity and welfare gains and losses within Thailand. We find that: 1) shrimp farmers experience a loss of income of $10,500 or 50% of their pre-ban income level but their income recover after 5-6 years to pre-ban levels; 2) shrimps’ farmers are more likely to transition to other sectors even after 10 years; 3) they accumulate assets in new sectors; 4) there are significant spillover effects on the local income for non-shrimps’ farmers.